Amidst continuing violence and a continuing trend of political infighting, an interesting investment opportunity has been brought to light by the researchers at TGSF and Euphrates Advisers. By breaking down the economic trends of the country after the intervention of US forces, and comparing its economic growth afterwards against that of Russia (the only other nation in the world that can be considered to have undergone a similar break-down and recovery through natural resources), they have established a particularly compelling perspective on the country.
Based on their findings, they believe that Iraq will present a very strong investment opportunity over the next decade for an investor that has access to the level of sophistication and patience required of such a venture. By looking at how it is that this opportunity is expected to unfold, we can break it down to a lower level of complexity, and determine how it is that there might then be an opportunity for personal investors to partake in the opportunity without being directly exposed to the kinds of deals that might go over our heads.
In order to provide some context to the argued value of an investment in Iraq as a growth story, we first must look at how it is that the country was in economic shambles previous to 2007. With a GDB of nearly half that which it is today, the country was experiencing inflation beyond 30%/year, and had real wages that were so low that people could not afford the costs of transportation associated with getting themselves to a job in the first place.
It wasn’t until the 2007 intervention that the economy was effectively shocked into legitimacy, as the central bank allowed the currency to appreciate in accordance to demand (as businesses bought up the currency to establish oil operations), and to establish a basis for importation that allowed consumers to maintain control of their purchasing power. From there, the greater amount of the violence subsided, despite the remaining presence of side-conflicts and in-fighting. While this doesn’t necessarily paint the nicest of pictures, it does set the stage for a developing growth story, as the government establishes its financial basis, and builds up an economic system.
Economically speaking, Iraq currently stands to develop a massive oil reserve. With production already growing by approximately 20% per year, it continues to represent what is thought to be some of the greatest capacity for oil production in the entire middle-east. This means that the value of the country’s currency is likely to appreciate out of demand for the commodities that need to be developed within, and that the value of existing properties will likely improve over time as the scale of pipeline and transportation capacity grows to accommodate greater volumes of production.
From there, the ability of the nation to invest into its own growth is expected to explode, as the nation currently doesn’t operate with a great deal of leverage. Between the ability of governments and businesses to borrow and invest in lucrative oil projects and the unbanked populations’ ability to gain improved access to debt and financial products through an increasing bank presence.
So how does a personal investor take advantage of this sort of trend? The trick is to look at the trend of Iraqi growth, and to determine how exposure to it can be taken on safely. This is best accomplished by finding companies that are developing their operations within the region, but on a minority basis. BP, the oil giant, is a good example of this sort of company, as it has operations in Iraq, but would not be dramatically hurt by a dramatic political event in Iraq. Similarly, large consumer banks with strong international operations (such as HSBC) might present an opportunity to take advantage of the credit-related opportunities. Lastly, taking advantage of emerging market ETF provide investors with a way to take on risks tied to the country on a more direct basis.